President Trump’s promise that the U.S. economy could reach 3 percent GDP growth if we adopted his policies has prompted many economists to respond with a reality check that 3 percent GDP growth is no longer achievable
This response may or may not be correct economically, but I think it’s also worth acknowledging that, politically, it’s a loser. I was struck by this after searching for responses to a recent piece by noted economists (and conservatives) John Cogan, Glenn Hubbard, John Taylor and Kevin Warsh. In an editorial published by the Hoover Institution, they wrote:
“The policy changes of the kind proposed by the Congress and the Administration, if enacted, would significantly improve the economy’s growth prospects … Could implementation of such a comprehensive economic plan raise the economic growth rate to 3 percent? We believe it can.”
Some in the media were quick to point out that Hubbard, Taylor, and Warsh are all under consideration to replace Janet Yellen as Fed Chair. Economists responded by saying, again, that 3% is a pipe dream.
Instead we need substantive discussion of what can generate faster economic growth. Rather than debating whether the American economy is stuck in a new-normal of 2% growth, we need to promote ideas that will increase economic growth and real wages for working families. After all, voters don’t care about GDP; they want good jobs, higher wages, and economic security. In the end, which politician are voters going to like more? A candidate who says we can do better? Or one who says we cannot, no matter what we do?
So what will improve economic growth? There are three I’s that can do this: immigration, infrastructure, and investment. However, their ability to bring us up to 3% growth is both doubtful and irrelevant.
Our nation’s immigration system is broken. Comprehensive immigration reform, such as the bipartisan legislation which passed the Senate in 2013 (Schumer-Rubio), would increase our nation’s work force, bring economic activity out of the shadows and into the mainstream, increase our nation’s economic and physical security, and boost our GDP. One estimate sees an increase in $1.5 trillion in GDP cumulatively over the next decade, as compared to the status quo. That same study contrasts with the deportation-only policy that appears to be favored by some in the Trump Administration, which would reduce economic output by over $2 trillion. Even scholars from the CATO Institute argue that immigration reform could be used to boost GDP, with an earlier estimate of an increase of over 1.25% of GDP.
The Cogan-Hubbard-Taylor-Warsh piece never mentions the word “immigration” when recycling the standard conservative proposals to cut taxes on the wealthy and slash domestic discretionary investment. Trumpian immigration policies undoubtedly reduce economic growth and are not consistent with his stated primary goal of raising growth. This contradiction is best addressed head on by those who propose alternative strategies to promote growth.
The second I is infrastructure. Here candidate Trump was right that our nation needs a major investment in infrastructure. He called for $1 trillion on the campaign trail, a promise that if followed through would create millions of new jobs. Infrastructure jobs are disproportionately middle-class (defined as wages between the 25% and 75% percentiles, so this is the real middle-class and not the upper-middle class; there is no Dream Hoarding going on here).
Infrastructure jobs have the added benefit of being in fields such as manufacturing and construction—areas that tend to employ more men, particularly those with the skill sets that have struggled in the recent labor market. One path to increasing our economic growth rate is by boosting participation in the labor force. Infrastructure jobs match many of the characteristics of those that have departed the labor force and were disproportionately filled by men. Perhaps this could help bring back some of the missing male workforce participation.
To maximize long-run economic growth we need to build more wisely by targeting infrastructure investment in areas that produce the highest return on investment (ROI). This is not a narrow ROI concept based on who is willing to pay the most; clean drinking water is a right our citizens should expect and not a privilege, for instance. Instead we must consider broad metrics of benefits, including health, environment, and maximizing economic impact and development. For example, the wonderful economic growth engine that is the Global Positioning System came from government investment in infrastructure (a note to Millennials—Google did not invent GPS, even if they have perfected the map that uses it). It also means that not every government-led investment will reap the economic rewards of GPS, just as how not every private sector start-up pans out (see satellite-based cell phones). But we must invest more wisely in our nation’s infrastructure for the present and the future, tolerating some failed experiments in order to reap the rewards of transformative investments.
Lastly, we need to increase our nation’s investment in research, development, and people. The federal government’s investment as a share of total research and development has fallen to multi-generational lows. Increasing the federal government’s investment will not bust the budget. Currently, the federal government’s entire investment in R&D (as measured by the OECD) is equal to only about one-tenth of our nation’s defense budget. Investments like these have proven track records of increasing economic growth. However, there are no quick fixes, and often these types of investments take years, or even decades, to realize their full potential, and it can therefore be difficult to quantify their exact impact on economic growth.
Increasing investment is the opposite direction that the House Republican budget has taken, a proposal which advocates increased cuts in R&D. Those cuts are necessary to create budgetary offsets for tax cuts, prioritizing additional income for the wealthy over investments in the future. The House Budget was endorsed by John Cogan, Glenn Hubbard, John Taylor, and Kevin Warsh.
During the financial crisis, Treasury Secretary Geithner used to frequently say that “plan beats no plan.” There is much wisdom in that saying, which holds true regardless of the merits of the plan. We should not fall into the temptation of rebutting Trump’s unrealistic assumptions by solely debating their realism. While it is important to point out that slashing taxes on the rich failed to generate growth when tried in Kansas, or that Republican claims that the 1993 Clinton tax hike would send us into a recession instead of the boom that followed, it is insufficient to only point out the mistakes of the Trump agenda. Instead we should offer plans that will make the lives of working families better. Whether that goal hits a made-up numerical target of a fictional concept is irrelevant. Whether it will make our nation better off is.